Bond ETFs Require a Look Under the Hood

The selloff in the bond market had some unexpected consequences for ETFs, which became more volatile than their underlying holdings. Here's why, and why it matters.

Being able to get out of an investment quickly and easily is top of mind since the financial crisis for many investors. It's also one of the lures of exchange-traded funds, which are bought or sold with the punch of a button. But last month's selloff in bond ETFs brings an important lesson: Having liquidity at your fingertips isn't the same thing as being in a truly "safe" investment. And it certainly doesn't mean avoiding big losses.

An ETF that trades more frequently than its underlying holdings tends to take...